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What Are Crypto Options?
Options are derivative contracts that give the buyer the right to buy or sell an asset at a set price before an agreed expiration date. When you buy or sell an option for a cryptocurrency, you don’t own the crypto itself. In this way, options allow you to gain exposure to almost any cryptocurrency without actually purchasing it.
Options have an expiry date, which sets out the point at which the contract must be fulfilled, and a strike price, which establishes the price for which the asset may be bought or sold before the option expires.
Depending on whether you believe an asset will rise or fall in value, you will need either a call or a put option.
Call options allow you to buy the underlying asset at a certain price before the contract expires. Calls are profitable when the market rises, but they don’t protect you from downswings.
Put options, on the other hand, let you sell an asset for an agreed price when the contract ends. Puts save you money during market downswings by allowing you to sell an asset at an earlier, higher price.
What Are Crypto Futures?
Futures contracts allow you to buy or sell a specific asset at a later date at a predetermined price. They were invented to smooth out price volatility in food and agriculture markets by allowing farmers to purchase crops or seeds in advance at an agreed price.
Similar to the options contracts we just looked at, futures are linked to, and derive value from, an underlying asset like commodities, stocks or crypto. Also like options, they let you gain exposure to a cryptocurrency without actually purchasing it.
However, whenever two parties enter into a futures contract, the underlying asset must be bought or sold when the contract expires. It is this obligation which makes futures trading inherently riskier than trading options.
Similarities of Crypto Options and Futures
Both are derivatives, which means they derive their value from underlying assets like stocks, commodities or, in our case, crypto.
However, neither options nor futures grant you ownership over the underlying asset itself, which is actually considered a benefit because you can profit from price swings in the crypto markets without ever buying any cryptocurrency.
While options and futures share many similarities, they also differ in several important ways.
Differences of Crypto Options and Futures
Options give you a choice – but not an obligation – to either buy or sell a cryptocurrency at a pre-agreed price before a certain date. In exchange for this assurance, you will have to pay a premium when you buy the contract.
Futures, on the other hand, obligate you to buy or sell a cryptocurrency at an agreed price when the contract expires. They do not, however, require you to pay premiums.
Of the two contracts, options are considered comparatively less risky because you have only, as the name suggests, the “option” to buy or sell, and not an obligation.
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